3 Unit property near major University in Philadelphia

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3 Unit property near major University in Philadelphia

Pierre Streat
Investor · Philadelphia, PA · Member since 2015 · 53 posts · 5 votes

Hello BP Family,

I was hoping to get your opinion please on a potential deal I am thinking of pulling the trigger on. Any college town Philadelphia investors out there?

So this is a 3 unit prop near a University in Philly with a price of about $275k. It is pretty much turn key with new flooring, walls, finished basement with washer/dryer/dish washer in each unit. Still need to get more info on the quality of the roof though and will be getting a contractor to look at it over the weekend. Bathtubs probably need caulking and I am getting the seller to fix all the windows, doors, downspouts, siding, countertops and HVAC.

Down Payment & Closing: $84k

Current rents: $2500 per month but should be about $2900 per month come Aug 2016 when school year starts up again

Prop. Management fee: 1st month's rent for finding new tenant (which will probably be every year since student housing has high turnover) plus 6% management fee

PITI: $1457 per month

Insurance: $1400 per year

Taxes: currently $2600 per year but apparently will rise to $4305 in 2016 due to higher assessment (current owner home improvements it looks like)

Vacancy: conservative 5% ($1500 per year) since this is student housing and probably will be filled easily 

Water/Sewer/Garbage/common electric: $2750 per year

Cap Ex: 5% of rents ($1500 per year)

Repairs: 5% of rents ($1500 per year)

Annual Net Income @ $2900/month rents: $3550

Cash on Cash Return: 6.31% in 2015 but will drop to 4.26% in 2016 when property taxes go up (comparable CoC is about 7.95% in 2015)

Cap Rate: 7.37%  (comparable cap rate in area is about 8%)

Would anyone buy this deal? Cash on Cash seems low to me but unsure if I am overestimating my costs here. How would you tackle the property tax increase issue? Can property taxes be written off? Am I estimating too much for Cap Ex? This deal looked pretty good before I factored in the Cap Ex and found out just yesterday that taxes would almost double. All thoughts and advice is greatly appreciated. Thanks.

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Jeff B.
Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
10y

I rented to students - - JUST ONCE - -.  They had no respect for the property or even each other.  Sold the unit and relocated my investment to draw families with kids.  Working out well now.

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  • Justin R.
    Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes
    10y

    PITI includes principal, interest, taxes, and insurance, yet you have those listed separately. I'll assume you really mean PITI is a total of $1457/m, and that you didn't double count the insurance and taxes.

    And, the cash-on-cash isn't really relevant without knowing what your loan amortization will be.  30y loan?  15y?  Residential conforming loan?  Commercial?

    If you calculate your IRR, it takes all this into account and is a far more effective way to compare this deal with other potential deals.

    0Reply
  • Pierre Streat
    OP
    Investor · Philadelphia, PA · Member since 2015 · 53 posts · 5 votes
    10y

    30 year Fixed at 5.1% and no I am not double counting. PITI before tax increase in 2016 is $1457.

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  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    10y

    I rented to students - - JUST ONCE - -.  They had no respect for the property or even each other.  Sold the unit and relocated my investment to draw families with kids.  Working out well now.

    1Reply
  • Pierre Streat
    OP
    Investor · Philadelphia, PA · Member since 2015 · 53 posts · 5 votes
    10y

    Thank you for the info J Beard but I am also factoring this in via cap ex and repair costs totaling $3000 per year plus parents will be co signing and I will be collecting security deposits to hedge this risk. Do you still think these hedges to be insufficient? Thanks

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  • Mark A.
    West Hartford, CT · Member since 2015 · 42 posts · 9 votes
    10y
    I would be hesitant to get into something with low returns. Especially since from what you're writing that the ROI will be even lower. Perhaps there is a way to increase rent by value adding in certain amenities? Anyway to buy at an even lower price?
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  • Jamal Pitts
    Investor · Philadelphia, PA · Member since 2011 · 90 posts · 21 votes
    10y

    @Pierre Streat  I'm assuming you are paying market price for the property since its a turn key property?  No equity and low rate of returns.  What is your motivation to move forward?

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  • Mike Wood
    Developer · New Orleans, LA · Member since 2015 · 1k+ posts · 898 votes
    10y

    @Pierre Streat I think your vacancy rate is too low for units focused on student housing. I have two (2) duplexes, right next (less than 1 block) to a University in New Orleans (University of New Orleans), and units stay vacant at least one (1) month between tenants.  Remember that not all tenants will leave exactly at the 12 month mark, some will continue for some time on month to month.  If you get too far from the start of school, you may be vacant for some time.

    Due to the high turnover, I only rent a max of half of my units to students. I purposely try and market my units to non-students, as they have less turnover.

    In general, you can try and weed out bad student tenants.  I have found that if they do not have enough verifiable income to cover things, asking for a parent to be on the lease is a good solution.  I have not had any horror stories of students, but have been quite careful renting to them.

    1Reply
  • Mike D'ArrigoPro Member
    Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
    10y

    @Pierre Streat I agree with what others are saying here. Those are very low returns, especially for MF. I don't think that a 5% vacancy is "conservative" by any means. I think this is way to optimistic for MF, especially for student housing.  I'm not an expert on the Philly market but I would think you could do much better than that there.  

    But since you're already investing out of state by going to Philly, why not go somewhere where you can find much better returns like the Midwest? Personally, I like Indianapolis and Kansas City.

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  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    10y

    Consider the school year,  Sept thru May/June.  High vacancy would be June, July, Aug; I see that as 3/12 or 20% vacancy, unless you get some grad students or faculty.

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  • Pierre Streat
    OP
    Investor · Philadelphia, PA · Member since 2015 · 53 posts · 5 votes
    10y
    Originally posted by @Mark A.:

    I would be hesitant to get into something with low returns.

    Especially since from what you're writing that the ROI will be even lower.

    Perhaps there is a way to increase rent by value adding in certain amenities? Anyway to buy at an even lower price?

    Probably can't add value via amenities besides laundry that I can think of but the competition is too strong to even think of charging students for laundry in house. $450 per room including laundry access is pretty standard. I am in contract for 275k so seller probably wont take my offer if I pull out and try to get back in.

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  • Pierre Streat
    OP
    Investor · Philadelphia, PA · Member since 2015 · 53 posts · 5 votes
    10y
    Originally posted by @Jamal Pitts:

    @Pierre Streat  I'm assuming you are paying market price for the property since its a turn key property?  No equity and low rate of returns.  What is your motivation to move forward?

    Market price is actually in the 290k+ range so there is some equity at first purchase. City assessed the building at 300k for 2016 tax purposes as well. I just got a bank to finance me at 20% down (69.575k total including closing costs) so the cash on cash actually looks like it is more around 8% and also getting market cap rate of about 8% as well. I could work with these numbers for my first investment property I am thinking but again I won't see these until Aug/Sep of next year when the school year starts.

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  • Mike Wood
    Developer · New Orleans, LA · Member since 2015 · 1k+ posts · 898 votes
    10y

    @Pierre Streat Is the property is a location that you could attract tenants that are not students? That could help with your rents and vacancy. 

    Also, if your only paying $275k for the property, I would fight the assessors and get it valued correctly.  It is very common around here for owners to get reassessed based on sales.

    You also might want to take a closer look at the PM costs.  if you have high turn over, you are loosing one months rent per year, plus the 6% fee.  I have one property with a PM (its out of state) and I pay 20% of the rent for the first month, 10% every month after.  If you have turn over every 12 months, you paying approx. 14% per month (when you average out that full first months rent). 

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  • Mark A.
    West Hartford, CT · Member since 2015 · 42 posts · 9 votes
    10y

    @Pierre Streat if you're already in contract then I would ride the boat and adjust the sails. 

    Remember that successful people don't make the right decisions, they make their decisions right. 

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  • Pierre Streat
    OP
    Investor · Philadelphia, PA · Member since 2015 · 53 posts · 5 votes
    10y
    Originally posted by @Mike Wood:

    @Pierre Streat Is the property is a location that you could attract tenants that are not students? That could help with your rents and vacancy. 

    Also, if your only paying $275k for the property, I would fight the assessors and get it valued correctly.  It is very common around here for owners to get reassessed based on sales.

    You also might want to take a closer look at the PM costs.  if you have high turn over, you are loosing one months rent per year, plus the 6% fee.  I have one property with a PM (its out of state) and I pay 20% of the rent for the first month, 10% every month after.  If you have turn over every 12 months, you paying approx. 14% per month (when you average out that full first months rent). 

    Good point, I forgot to factor in the 1 month's rent to find tenant every year so that makes the CoC more like 4.95%. I could fill the units with Section 8 if I could not find a student in time for the school year but again the rent probably will not be as high as students.

    Will definitely have to fight the assessors since the 300k assessment value is way too high. What has your experience been like fighting this with a municipality?

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  • Mike Wood
    Developer · New Orleans, LA · Member since 2015 · 1k+ posts · 898 votes
    10y

    I would definitely not recommended section 8. If students and section 8 are your only options, this might not,be a great property. Of those were my only tenant options, I would pass.

    Students don't think of their places as home, where non-Students think about the unit, as there home, and typically take better care of the property. But if the neighborhood is so bad that only section 8 tenants want to live there, thats not so good.

    I think you mentioned this was your first propery, if so. I would pass. It sounds like it might be a tough on.

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  • Bill ThompsonPro Member
    Rental Property Investor · Jamaica Plain, MA · Member since 2015 · 60 posts · 88 votes
    10y

    @Pierre Streat perhaps you can reposition the property to appeal to grad students instead of undergrads.  This would address the turnover issue since a one-year lease is the norm (for my rentals anyway) for this type of tenant.  I've even had grad students ask for a two-year lease to "lock-in" their housing costs. 

    Beyond the numbers, you need to serious consider whether you can handle being a landlord to undergrad students.  I do not have direct experience with them, but we have all heard the horror stories.  I understand you intend to use a PM but even the best PM is going to have a hard time with this group... I'm envisioning loud parties, routine drug selling and consumption, roommate issues, etc.  I don't think I would be comfortable renting to undergrads unless there was a full-time resident manager on the premises... too much risk for too little return.

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  • Pierre Streat
    OP
    Investor · Philadelphia, PA · Member since 2015 · 53 posts · 5 votes
    10y
    Originally posted by @Mike D'Arrigo:

    @Pierre Streat I agree with what others are saying here. Those are very low returns, especially for MF. I don't think that a 5% vacancy is "conservative" by any means. I think this is way to optimistic for MF, especially for student housing.  I'm not an expert on the Philly market but I would think you could do much better than that there.  

    But since you're already investing out of state by going to Philly, why not go somewhere where you can find much better returns like the Midwest? Personally, I like Indianapolis and Kansas City.

     I could probably do better just outside of the City in Philly but it would be more of a low-income tenant base with a low/declining population, less income per capita and net worth than in the City, higher unemployment and more vacancy. The City just seems safer for my first investment and I think I would have to be more familiar with the Philly market to make bets on these remote neighborhoods.

    I have considered further out but since this is my first investment property I would like to start somewhere in my "backyard" before I venture out to the Midwest, Atlanta, Dallas etc. I mean sure I can find a property manager for 10% but will he be great and care for the property as if it were his own? What if there are issues there where I need to be present? This means hundreds of dollars in traveling just to visit each time and the time off taken to do so just seems to be a bit much for me right now. I will consider these options though once I get my feet wet in RE and hopefully build relationships with people in these out of state markets via BiggerPockets etc. I don't feel comfortable just buying property with high cash flow out of state, giving it to a stranger to manage without being close enough to really know what is going on regularly.

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  • Mark Redmann
    Investor · Philadelphia, PA · Member since 2013 · 177 posts · 80 votes
    10y

    where is the property? @Pierre Streat

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  • Pierre Streat
    OP
    Investor · Philadelphia, PA · Member since 2015 · 53 posts · 5 votes
    10y
    Originally posted by @Mark Redmann:

    where is the property? @Pierre Streat

     Near Temple University

    0Reply
  • Ron Kilbreath
    Investor · Owen Sound, Ontario · Member since 2015 · 13 posts · 3 votes
    10y
    Originally posted by @Pierre Streat:

    Hello BP Family,

    I was hoping to get your opinion please on a potential deal I am thinking of pulling the trigger on. Any college town Philadelphia investors out there?

    So this is a 3 unit prop near a University in Philly with a price of about $275k. It is pretty much turn key with new flooring, walls, finished basement with washer/dryer/dish washer in each unit. Still need to get more info on the quality of the roof though and will be getting a contractor to look at it over the weekend. Bathtubs probably need caulking and I am getting the seller to fix all the windows, doors, downspouts, siding, countertops and HVAC.

    Down Payment & Closing: $84k

    Current rents: $2500 per month but should be about $2900 per month come Aug 2016 when school year starts up again

    Prop. Management fee: 1st month's rent for finding new tenant (which will probably be every year since student housing has high turnover) plus 6% management fee

    PITI: $1457 per month

    Insurance: $1400 per year

    Taxes: currently $2600 per year but apparently will rise to $4305 in 2016 due to higher assessment (current owner home improvements it looks like)

    Vacancy: conservative 5% ($1500 per year) since this is student housing and probably will be filled easily 

    Water/Sewer/Garbage/common electric: $2750 per year

    Cap Ex: 5% of rents ($1500 per year)

    Repairs: 5% of rents ($1500 per year)

    Annual Net Income @ $2900/month rents: $3550

    Cash on Cash Return: 6.31% in 2015 but will drop to 4.26% in 2016 when property taxes go up (comparable CoC is about 7.95% in 2015)

    Cap Rate: 7.37%  (comparable cap rate in area is about 8%)

    Would anyone buy this deal? Cash on Cash seems low to me but unsure if I am overestimating my costs here. How would you tackle the property tax increase issue? Can property taxes be written off? Am I estimating too much for Cap Ex? This deal looked pretty good before I factored in the Cap Ex and found out just yesterday that taxes would almost double. All thoughts and advice is greatly appreciated. Thanks.

     If I read the figures correctly you would be netting about $300/month? $3,600/year? And it will cost you $84,000 out of pocket to purchase? That's roughly 4.3% return on your money and you confirm as being 4.26%.

    Myself personally, I wouldn't touch it. There are much better deals out there IMHO. Hope that helps.

    0Reply
  • Pierre Streat
    OP
    Investor · Philadelphia, PA · Member since 2015 · 53 posts · 5 votes
    10y
    Originally posted by @Ron Kilbreath:
    Originally posted by @Pierre Streat:

    Hello BP Family,

    I was hoping to get your opinion please on a potential deal I am thinking of pulling the trigger on. Any college town Philadelphia investors out there?

    So this is a 3 unit prop near a University in Philly with a price of about $275k. It is pretty much turn key with new flooring, walls, finished basement with washer/dryer/dish washer in each unit. Still need to get more info on the quality of the roof though and will be getting a contractor to look at it over the weekend. Bathtubs probably need caulking and I am getting the seller to fix all the windows, doors, downspouts, siding, countertops and HVAC.

    Down Payment & Closing: $84k

    Current rents: $2500 per month but should be about $2900 per month come Aug 2016 when school year starts up again

    Prop. Management fee: 1st month's rent for finding new tenant (which will probably be every year since student housing has high turnover) plus 6% management fee

    PITI: $1457 per month

    Insurance: $1400 per year

    Taxes: currently $2600 per year but apparently will rise to $4305 in 2016 due to higher assessment (current owner home improvements it looks like)

    Vacancy: conservative 5% ($1500 per year) since this is student housing and probably will be filled easily 

    Water/Sewer/Garbage/common electric: $2750 per year

    Cap Ex: 5% of rents ($1500 per year)

    Repairs: 5% of rents ($1500 per year)

    Annual Net Income @ $2900/month rents: $3550

    Cash on Cash Return: 6.31% in 2015 but will drop to 4.26% in 2016 when property taxes go up (comparable CoC is about 7.95% in 2015)

    Cap Rate: 7.37%  (comparable cap rate in area is about 8%)

    Would anyone buy this deal? Cash on Cash seems low to me but unsure if I am overestimating my costs here. How would you tackle the property tax increase issue? Can property taxes be written off? Am I estimating too much for Cap Ex? This deal looked pretty good before I factored in the Cap Ex and found out just yesterday that taxes would almost double. All thoughts and advice is greatly appreciated. Thanks.

     If I read the figures correctly you would be netting about $300/month? $3,600/year? And it will cost you $84,000 out of pocket to purchase? That's roughly 4.3% return on your money and you confirm as being 4.26%.

    Myself personally, I wouldn't touch it. There are much better deals out there IMHO. Hope that helps.

     Thank you for the advice Ron but where exactly are these deals that are close to the NYC metro area? This is my first investment property so would you recommend even longer-distance investing at this stage of my experience?

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  • Ron Kilbreath
    Investor · Owen Sound, Ontario · Member since 2015 · 13 posts · 3 votes
    10y

    Good question Pierre. To be honest with you I am new here and do not have enough experience to offer you advice on that issue as there are many variables. One of which you can probably answer yourself. How comfortable would you feel in being an absentee landlord and relying on others such as property management companies to look after things for you?

    I'm sorry I can't be of any more assistance but there are plenty of experienced investors on this site that will be able to give you much better advice then I can.  Good luck Pierre!

    0Reply
  • Pierre Streat
    OP
    Investor · Philadelphia, PA · Member since 2015 · 53 posts · 5 votes
    10y
    Originally posted by @Mark Redmann:

    where is the property? @Pierre Streat

     On the Southwest side of Temple.

    0Reply
  • Pierre Streat
    OP
    Investor · Philadelphia, PA · Member since 2015 · 53 posts · 5 votes
    10y
    Originally posted by @Bill Thompson:

    @Pierre Streat perhaps you can reposition the property to appeal to grad students instead of undergrads.  This would address the turnover issue since a one-year lease is the norm (for my rentals anyway) for this type of tenant.  I've even had grad students ask for a two-year lease to "lock-in" their housing costs. 

    Beyond the numbers, you need to serious consider whether you can handle being a landlord to undergrad students.  I do not have direct experience with them, but we have all heard the horror stories.  I understand you intend to use a PM but even the best PM is going to have a hard time with this group... I'm envisioning loud parties, routine drug selling and consumption, roommate issues, etc.  I don't think I would be comfortable renting to undergrads unless there was a full-time resident manager on the premises... too much risk for too little return.

     Thank you for the advice Bill and you make sense. But how would you go about repositioning the property to appeal to grad students without breaking discrimination laws? I can run this by my PM/agent but I would think the grad student market would be so much smaller than undergrad to even compensate for the difference.

    0Reply
  • Pierre Streat
    OP
    Investor · Philadelphia, PA · Member since 2015 · 53 posts · 5 votes
    10y
    Originally posted by @Mike D'Arrigo:

    @Pierre Streat I agree with what others are saying here. Those are very low returns, especially for MF. I don't think that a 5% vacancy is "conservative" by any means. I think this is way to optimistic for MF, especially for student housing.  I'm not an expert on the Philly market but I would think you could do much better than that there.  

    But since you're already investing out of state by going to Philly, why not go somewhere where you can find much better returns like the Midwest? Personally, I like Indianapolis and Kansas City.

     I appreciate your input though Mike. Thanks.

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